Gold, silver and copper are all metals that I am bullish on at the moment, so Azerbaijani miner Anglo Asian Mining (AAZ) fits the bill perfectly in covering all three of those. It isn’t a company that I have followed closely in the past, but I decided to take a look after a couple of people highlighted it to me, and I like what I see and think that it has plenty of potential as an investment.
This AIM listed outfit has been producing gold since 2009, and currently its output of the yellow metal, along with copper and silver, mainly comes from the Gedabek site, but there are also plenty of further upsides possibilities from its other projects. As well as further exploration at its existing producing licences – such as at Ugar - to potentially extend mine life, it also has the Ordubad licence area, and extensive work was carried out last year across all of its assets.
A maiden JORC was recently completed at the already producing Gadir underground mine, and estimated proven and probable gold reserves of 70,000 ounces, along with 304,000 ounces of silver and nearly 1.4kt of copper. Additionally there was measured and indicated gold resources of 145,000 ounces; 736,000 ounces of silver; and 14.5kt of copper. There was also an update on Gedabek, which has a mine life until around 2024 currently, but exploration is underway to assess the potential for expansion targeting copper. In terms of reserves, it currently has 343,000 ounces of gold in the proven and probable category, along with nearly 3.5 million ounces of silver, and 36,000 tonnes of copper. But again, there is potential upside from over 800,000 ounces of measured and indicated gold resources, plus nearly 7 million ounces of silver, and when combining the mining area with the possible copper extension, there are nearly 85,000 tonnes of copper in this category.
So, it wouldn’t take much of those resources being converted into reserves to significantly extend the life of the asset. Of course, it is all very well talking about assets in the ground, but as we know it all comes down to how the company is actually performing – there are loads of AIM listed miners that will claim to be worth huge amounts based on what is in the ground, but the economics of actually extracting it is what matters. The good news is that for Anglo Asian it has proven to be profitable, so much so that it actually pays a dividend - $0.06 for the full year 2018, and it is forecasting at least the same for 2019 as well. At current exchange rates that translates to roughly 4.5p/share, and based on the current mid share price of 72.5p, that gives a yield of roughly 6.2% which is fairly attractive, especially compared to many of its peers and considering it is a small company with a market cap of just £83 million.
You do have to consider the fact though that if the mine life stays at 2024 and there is no further extension through all of the work it is carrying out, then it wouldn’t have worked out very well for shareholders in terms of the amount of money actually returned to them during the life of the mine. But then that is the same for many miners, and mine life is constantly extended as further work is carried out, or new licence areas come online, and that looks to be the case here, given the level of resources, plus exploration elsewhere as well. In terms of what to expect during the current year, production isn’t likely to see much growth with forecasts set at 82,000 to 86,000 gold equivalent ounces – compared to actual production of just under 84,000 GEOs in 2018 – and gold production is likely to drop by around 5% or so, but that will be offset by copper production roughly doubling.
With the current prices of metals, and expectations of where they will go over the coming months, that alone could see the company exceeding its guidance for its financial performance, as it bases that on a gold price of $1,250/oz, silver at $15/oz and copper at $6,100/t. The company is profitable as well, with a pre-tax profit of $8.1 million for the first half of 2018, and I would assume that to be similar for H2 as well, given that the dividend was set at the same amount and the company has a policy to return at least 25% of free cash flow each year. During the three months up until the end of 2018 it had increased its net cash position by $3.3 million, to $6.1 million, and doesn’t have high levels of debt either – it has enough to repay the Pasha Bank loan as it becomes due and still to have cash remaining.
The economics of its operations look very attractive as well, with All-in Sustaining Costs of just $543/oz in H1 2018, so there is an awful lot of scope to remain profitable on an operational basis during any periods of lower commodity prices.It is also good to see a CEO with plenty of skin in the game himself, as Reza Vaziri holds more than 28% of the shares in issue. There should be plenty of news here to maintain interest as well going forwards, aside from the strong performance - including planned exploration at Ordubad and it also intends to reassess the large resources potentially contained there that were previously classified during the Soviet era.
Recently the share price has drifted, but I would expect it to find strong support around the 65-70p level, where it has always found good support every time it has dipped that low during the past six months. Like any smaller AIM miner it certainly isn’t without risks and a lot depends upon operations continuing to run smoothly, but at the current market valuation of just £83 million, the shares seem cheap to me and a good longer term speculative buy, with a chance that the company will eventually grow into a mid-tier producer.
Filed under: Azerbaijan, Anglo Asian Mining, AAZ, Gary Newman
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